Range of Reliance Required for Misrepresentation Claims

In a typical fraud or negligent misrepresentation claim, a plaintiff must prove that the defendant made a false representation, intentionally or recklessly, which the plaintiff relied on and which led to compensable harm.  However, jurisdictions differ on how they treat the “reliance” element of this tort.

Recently, the Vermont Supreme Court strictly construed a plaintiff’s direct reliance on an alleged misrepresentation.  In the case of Glassford v. Dufresne & Associates, P.C., 2015 VT 77 (June 12, 2015), the Court affirmed an entry of summary judgment in favor of a defendant engineer who certified a septic system under Vermont law (10 V.S.A. § 1973) where there was no evidence that plaintiffs directly relied on the certification.  Rather, plaintiffs-homeowners alleged negligent misrepresentation claiming they indirectly relied on the certification through their closing attorney who received a copy of it and in turn represented the marketability of title upon which plaintiffs relied.  The Vermont Supreme Court surveyed several jurisdictions’ case law in its determination that such indirect reliance is insufficient to extend negligent misrepresentation liability to a defendant.  Georgia, Illinois, Nebraska, North Carolina, and Texas are among the states whose courts have refused to extend liability for indirect reliance.  See, e.g., White v. BDO Seidman, LLP, 549 S.E.2d 490, 493-94 (Ga. Ct. App. 2001); Cahill v. E. Benefit Sys., Inc., 603 N.E.2d 788, 792 (Ill. App. Ct. 1992); Knights of Columbus Council 3152 v. KFS BD, Inc., 791 N.W.2d 317, 328-31 (Neb. 2010); Brinkman v. Barrett Kays & Assocs., 575 S.E.2d 40 (N.C. Ct. App. 2003); Va. Oak Venture, LLC v. Fought, 448 S.W.3d 179, 186-87 (Tex. App. 2014).
Maryland, however, is among the states that recognize third party misrepresentation claims on the basis of indirect reliance.  Exxon Mobil Corp. v. Albright, 433 Md. 303, 335–36 (2013). In fact, just earlier this year Maryland’s Court of Special Appeals led the state’s jurisprudence further down the indirect end of the reliance spectrum by holding that a parent’s reliance may be imputed to a minor child in a misrepresentation claim.  White v. Kennedy Krieger Institute, No. 1015 (Md. Ct. Spec. App. February 26, 2015).  

New Jersey is another state that allows indirect reliance to support a fraud claim.  See, e.g., Kaufman v. i-Stat Corp., 324 N.J. Super. 344, 349, 735 A.2d 606 (App. Div. 1999) (“Indirect reliance has also been adopted by the Restatement (Second) of Torts for situations involving reliance by party B on a false representation initially made to party A who the maker knew or had reason to expect would communicate the information to party B such that the information would influence party B's conduct in a transaction.”) (citing Restatement (Second) of Torts § 533 (1977).  The majority of federal courts, however, have held that § 552 of the Restatement requires actual, direct reliance before a party may be liable for negligent misrepresentation. In re Sofamor Danek Grp., Inc., 123 F.3d 394, 404 (6th Cir. 1997).

Accordingly, companies defending claims of negligent misrepresentation in different jurisdictions will have to consider where that jurisdiction falls in the strict construction continuum regarding reliance in order to accurately assess the claim.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.